*Short Term*The most obvious reason why retailers should stop
reporting monthly sales is that the measure is incredibly short term
in nature and thus difficult to use to make any conclusions about the
company. Can you imagine the chaos that would result if you had to
report earnings every month?
Monthly same store sales reports encourage deviant behavior by
managements that are eager to meet the guidance and expectations that
investors have on these figures. The management team should instead
be making decisions that are best for the long term interests of the
company and should not be focused on a short term measure reported
monthly.
One game that retailers play is to get promotional on retail prices to
help boost the top line for the company. While this may help the
company meet same store sales guidance, it may also lower
profitability and impact the brand that the company has been trying to
build.
*Growth Is Overrated*The attention focused on same store sales growth
from month to month by investors also implies that growth is necessary
for a retailer to be a successful company or investment. This is not
necessarily true as growth at the expense of profitability usually
ends badly in the long term, with too much leverage and a death
spiral for the company.
*Excuses*Reporting same store sales monthly also distracts management
from other more important tasks as they spend a considerable amount of
time trying to explain away a negative report. It's always the
weather that caused the decline or a tough comparable that the company
was up against.
*Exclusions*Same store sales reports also don't encompass the entirety
of the company, as the measure often doesn't contain any direct to
consumer or internet sales for retailers, which are becoming a growing
part of revenue for many companies. In the most recent quarter,
*Abercrombie & Fitch* (NYSE:ANF) reported that direct to consumer
sales increased 52% to $99.5 million. *Urban Outfitters*
(Nasdaq:URBN) also reported a large increase in these types of sales,
with direct to consumer sales up 28% for the two month period ending
December 31, 2010.
*The Bottom Line*Perhaps other retailers should follow the example of
some of the largest retailers in the United States. *Wal-Mart*
(NYSE:WMT) stopped reporting monthly sales to investors in May
2009. *Macy's* (NYSE:M) did the same starting in 2008, but later
reversed its decision and started reporting them again before the year
ended.
Investors and analysts seem to think that same store sales is the best
method of appraising a retailer. The real truth is that the measure is
short term and tends to encourage behavior by management that is not
in the long term interests of the company. (To dig deeper about retail
stocks, see _Analyzing Retail Stocks_.)
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Source: Investopedia.Com
